If there is any doubt that the long-talked about but never materializing
information appliance is about to burst onto the scene. This week's
business Week's cover story describes the upcoming developments.
kelly
BUSINESSWEEK ONLINE : MARCH 8, 1999 ISSUE
COVER STORY
Beyond the PC
Who wants to crunch numbers? What we need are appliances to do the
job--and go online
It's the end of a long day of crime-fighting, and Dick Tracy is cold
and hungry. After turning up the collar of his trench coat, Detective
Tracy climbs into his sedan and asks the voice-activated navigational
system to tell him the best route home. He arrives and plops down on
the couch, and touches the ad on the screen of his picture phone for
free delivery of the local diner's blue-plate special. Just then, Tess
Trueheart E-mails good news from her wireless phone: The rotten Sal
Monella has been nabbed for selling tainted hot dogs. Relieved, Tracy
turns on the news--his TV automatically stores his favorite shows for
convenient viewing. But he's quickly bored and climbs into bed to
read. Moments later, the ultimate crime-stopper is fast asleep, his
paperless electronic book cradled in his arms.
Sounds like another highfalutin vision of technology from the same
gumshoe who gave us the high-tech wristwatch. But hold on. All of
Tracy's gizmos are available today--from the Clarion Auto PC to the
InfoGear iPhone to the electronic book from SoftBook Press. And
they're just the edge of a digital tidal wave that will wash over the
high-tech landscape, bringing us everything from gadgets straight out
of a comic strip to Internet-connected versions of everyday products
such as TVs, phones, and fax machines. ''We're entering the consumer
era of computing,'' says Donald A. Norman, co-founder of consultancy
Nielsen Norman Group and a leading apostle of so-called information
appliances--simple devices that do one or two jobs cheaply and well.
''The products of the future will be for everyone.''
That's a slap at the personal computer. But even Andy Grove and Bill
Gates seem to know their companies' futures no longer depend solely on
the PC. Intel Corp. (INTC) is putting its muscle behind new chips
aimed at low-power gadgets and is even designing new appliances for
the living room. And Gates, who believes more non-PC devices than PCs
will be attached to the Internet within 10 years, has Microsoft Corp.
(MSFT) creating software for easy-to-use products such as car
navigation systems, set-top TV boxes, and electronic organizers.
Gates and Grove are right to think beyond the PC. The high-tech
industry is on the cusp of a new era in computing in which digital
smarts won't be tied up in a mainframe, minicomputer, or PC. Instead,
computing will come in a vast array of devices aimed at practically
every aspect of our daily lives. Unlike complex desktop PCs, these
information appliances--following on the lead of 3Com Corp.'s (COMS)
handheld Palm computer and Microsoft's WebTV--will be simple and
convenient.
Think divergence instead of convergence. To become as ubiquitous as
VCRs and microwave ovens, analysts say, information devices have to be
much simpler than today's PCs. Rather than rolling more features into
computers, newer devices need to be designed to perform only a few
specific functions. After all, who needs a desktop PC that could land
a spaceship on the moon if all they want to do is send E-mail? ''The
PC is so general-purpose that very few of us use more than 5% of its
capability,'' admits Hewlett-Packard Chief Executive Lewis E. Platt.
Now, everybody from startup to industry giant is answering the call.
The resulting scramble could turn high-tech's pecking order on its
head. Until now, the PC was the only route to cyberspace--and PC
makers had only to ride the Wintel standard based on Intel chips and
Microsoft software to get in on the action. The future won't be so
easy. Winning in the digital-appliance business will depend not on the
latest geek-specs, like megahertz and gigabytes, but on identifying
consumer needs--and satisfying them with products that hide their
complexity.
LOST CAUSE. Indeed, after a 20-year tear, the PC--one of the world's
fastest-growing products--is already coming down to earth. And
swiftly. PC prices are plummeting, and unit sales aren't making up the
difference. While PC shipments should grow 15% this year, that's down
from the heady 35%-plus rates in the mid-1990s. And with prices
falling, analysts expect PC revenue for the industry to grow at an
anemic rate--less than 5%. Meanwhile, market researcher International
Data Corp. says Net access is now 94% via the PC; but that number will
fall to 64% in 2002, thanks to set-top boxes, Web phones, and
palm-size computers. By 2002, more information appliances will be sold
to consumers than PCs.
Gates's dream of putting a PC in every house may now be a lost cause.
While 48% of U.S. homes now have a PC, analysts don't expect that to
rise above 60% because information appliances will take on many of the
jobs now handled by the PC. That means PC makers, for the first time,
will have serious competition in cyberspace. And with the top five
companies already selling more than 50% of all PCs, even stellar PC
companies may have trouble posting the go-go gains of the past. Dell
Computer (DELL) found that out on Feb. 16. That was when Wall Street
pounded its stock after the company reported revenue for the fourth
quarter ended Jan. 29 rose 38%, well below its typical 50%-plus clip.
Not that the PC will disappear as the on-ramp to the Information
Highway. For people with home offices or school-age kids, the
versatility of the PC is still hard to beat--especially with prices so
low. ''We're rapidly moving into the post-PC era,'' says Paul E. Horn,
a senior vice-president and head of research for IBM. But ''the PC
isn't going to go away any more than the TV made radio go away.''
Indeed, analysts expect PC unit sales growth to remain in the low
double-digit range well into the next decade. ''Consumers are pretty
smart,'' says Steve Jobs, Apple Computer Inc.'s interim CEO. ''If for
an extra 10% they can get something that does so much more than some
single-function device, they'll take it.''
Of course, that doesn't mean Jobs and other PC pioneers are standing
still. Apple (AAPL), which made a major step forward in ease of use
with the introduction of its elegant iMac PC last year, is expected to
unveil a slick-looking handheld Mac this spring. Meanwhile, Microsoft
has spawned a new generation of handheld products via its Windows CE
technology, including the new Jupiter design for mini-laptop PCs that
run up to 12 hours on one charge. Vadem Inc.'s $999 Clio, for
instance, appeals to road warriors because the 3.2-pound device has a
larger screen and is more comfortable for E-mail or Web browsing than
3Com's popular Palm.
What's going on? Most people don't believe there's a compelling reason
to buy cutting-edge machines. After years of being swayed by claims
that only the latest, most powerful machines will do, consumers are
waking up to a new reality: Today's $400 PCs are good enough for most
tasks--especially connecting to the Net. Pushing the latest
high-octane machine just isn't working. ''People are realizing that
whether you own a 300-Mhz PC or a 400-Mhz PC, it isn't going to change
your life that much,'' says Alain Couder, CEO of Packard Bell NEC Inc.
''That's scary for us. We need to get real.''
Such an admission would have been considered high-tech heresy two
years ago. But today, there's a dazzling new spurt of innovation in
Silicon Valley. St. Paul Venture Capital, Flatiron Partners, and
Matsushita Electric have earmarked $140 million to invest in
info-appliance companies. Nokia (NOK.A), Motorola (MOT), and at least
five other phone makers are developing Web phones. And HP (HWP), IBM
(IBM), Sun Microsystems (SUNW), and Sony (SNE), among others, are
preparing a host of newfangled gadgets from palm-size scanners to the
underlying chips and software that will power these devices.
Meanwhile, scores of startups are spinning out whizzy new products
ranging from a countertop Web browser for the kitchen that doubles as
a TV and CD player, to a tiny gadget that health maintenance
organizations will give chronically ill patients so doctors can check
their vital stats online.
NO TOASTER. It's not just this slew of gee-whiz devices that will make
information appliances commonplace. Mundane products already found in
many homes will also get far smarter. Cameras, TVs, cell phones, and
cable boxes are going digital, making it far easier to add new
features that let them take on jobs now done by the PC--including
Internet access. By next year, for instance, some fax machines will be
made to work over the Net so you won't have to rack up long-distance
charges to zip a letter to London. And cell-phone pioneer Qualcomm
Inc. (QCOM) will add ''microbrowsers'' to its phones to allow them to
read online data. Says Paul E. Jacobs, president of Qualcomm's
cell-phone division: ''People think cell phones are more like toasters
than they are like PCs--but that's wrong.''
What's feeding this explosion of innovation? You guessed it. The
Internet. Computer scientists have been predicting the advent of
information appliances for more than a decade. But now, the Internet
has become a truly social phenomenon, with oodles of new information
and hundreds of innovative services added on a monthly basis.
Consumers want information appliances ''to access services on the
Net,'' says Claude M. Leglise, who heads Intel's new home-products
group. And more consumers are wondering if they really need a PC just
to get wired. ''I haven't felt any compulsion to buy a PC,'' says
Robert Anderson, a nurse from West Palm Beach, Fla., who is completely
satisfied surfing the Net with his WebTV--and not at all envious of
PC-using friends.
Consumers like Anderson won't suffer from lack of alternatives to the
PC. That's because software and chip technology has reached the point
where it's possible to build inexpensive devices with enough memory,
storage, and screen size to be useful. The explosion of information
appliances will, in turn, boost the number of Net connections in the
home. By 2002, predicts market watcher Jupiter Communications, 56% of
U.S. homes will have a Net connection, up from 32% today. And more
U.S. homes--13.9 million in 2002, vs. 1 million in 1998--will have
faster Internet connections, according to IDC.
MORE CLICKSTREAM. Translation: More people will spend more time
online. In today's PC-centric world, cybernauts spend up to 40 hours a
month online, says Sky Dayton, chairman of Internet service provider
EarthLink Network Inc. But by giving consumers the devices to log on
to the Web more often and more conveniently--say, to check the local
movie schedule or even buy a car--that could rise to 200 hours. ''That
kind of clickstream becomes incredibly valuable,'' Dayton says,
referring to the number of Web sites consumers will visit or ''click
to'' when online.
To reach the masses of tech-shy users, though, companies need cheaper
and easier-to-use digital devices. That's driving a fundamental change
in how products are conceived. Instead of designing cool boxes and
hoping they find uses, companies are dreaming up services--and then
building devices that can deliver them. What's more, these devices
will let companies lock customers into their services--and harvest
rich new revenues from advertisers and E-merchants.
Take Alcatel. The French phone giant spent a year surveying media and
telephone companies before designing a phone that offers touch-screen
Web access. They told Alcatel the phone had to show voice mail,
E-mail, and faxes on one screen. The companies also wanted a
laptop-style color screen rather than black and white. And to help
telephone companies subsidize the $500 price of the phone, Alcatel
(ALA) drummed up support from E-commerce companies such as Yahoo!
(YHOO), Amazon.com (AMZN), and others to buy links on the phone's
startup screen. The argument: This placement could be as valuable as a
spot on the Windows desktop. By 2002, Alcatel expects to have sold 1.5
million WebTouch phones, which will be offered to consumers for around
$400 starting this September.
Online companies are just itching for ways to snag more users. Yahoo!,
E*Trade (EGRP), and Sportsline.com, for example, are eyeing new ways
to deliver their services, particularly to smart cell phones. Doing
business in Denver? Your phone could give you the traffic conditions,
or tell you whether there are seats available at the Nuggets game.
GeoVector Corp., a four-person Silicon Valley startup, even makes
software that would let you point your phone at a restaurant to gather
whatever info has been posted on the local online Yellow Pages--say, a
free glass of wine with the early-bird special.
Some online companies are doing more than scour the market for new
devices: They're helping to create them. AT&T recently set up a lab in
its Silicon Valley research and development center to build prototypes
of new kinds of gizmos, including handheld devices that, among other
things, could capture and play videos, or be controlled via voice. And
online giant America Online Inc. (AOL) is working with
partners--including Sun Microsystems--on new products tuned to its
service. One possibility: a sub-$300 set-top box based on Sun's
JavaStation computer now sold to corporations, according to analysts.
AOL plans to unveil these devices, part of its ''AOL Anywhere''
strategy, by this summer. ''We're going to play a major role in this
next generation of non-PC connected appliances,'' vows Barry Schuler,
AOL's president for interactive services.
At stake is customer loyalty. Consider the experience of Tom Benton,
38, of Claverack, N.Y. His engagement to his fiancee in Mexico was
straining his budget until he bought a device from Aplio Inc. that
lets him make free phone calls over the Net. The device, conveniently
located next to the phone in his kitchen, is a snap to use. ''You just
pick up the phone. It's natural,'' he says. Now, his monthly bill is
back down to $20 from a wallet-crunching $200, and the marriage is on.
A KITCHEN BROWSER. It's stories like Benton's that inspired
entrepreneur Bob Lamson to go back into the kitchen. Lamson, who made
millions inventing a line of home breadmaking machines in the 1980s,
has built a new gadget that merges a 9-inch TV, CD player, and a
one-touch Web browser into a contraption that attaches to the bottom
of a cabinet. His company, CMi Worldwide, will produce the black gizmo
at a price of $800, with an additional $20 monthly fee for Internet
service. There's also a $1,500 to $2,000 countertop version that looks
just like a small TV, with a 12-inch screen. ''More than 50% of
[homemakers] are not PC-literate--and they're big shoppers,'' says
Lamson, who has already signed up appliance maker Salton as a
distributor. He's also talking with phone companies and online grocery
service Peapod Inc. about supporting the gadget.
Kitchen gadgets and Web phone-screens won't be the only new cyber real
estate. The TV, a fixture in 98% of U.S. homes, is an obvious
candidate. Roel Pieper, Philips Electronics' (PHG) top digital exec,
points out that Americans spend 3.6 billion hours a month in front of
the TV, vs. 300 million for the PC. ''Capitalizing on digital TV is
the next big thing in Silicon Valley,'' says Michael Ramsay, the CEO
of set-top startup TiVo Inc., whose backers include billionaire
Microsoft co-founder Paul G. Allen. General Motors Corp. (GM) is
already working with TiVo to figure out how to deliver targeted ads.
Entrepreneurs and giants alike are tapping into a growing pool of
chips and software aimed at info appliances. IBM, for example, has
devised a disk drive half the size of a credit card that can hold 340
megabytes of data--enough to store 80 full-length books. The
microdrive, due out this year, will cost approximately $350, but IBM
expects the price to fall below $100 once volume picks up in a few
years. Meanwhile, startup iReady Corp. has created
''Internet-on-a-chip'' technology that lets manufacturers add Net
access to everything from fax machines to TVs for less than $10. Seiko
Epson Corp. is using the chip to make smart screens that can be
dropped into fax machines or used as stand-alone Net browsers.
NO MORE HAMMERLOCK? Progress is also picking up in the critical area
of software. Sun Microsystems Inc.'s elegant Jini software, unveiled
on Jan. 23, could become the lingua franca for devices ranging from
coffeemakers to supercomputers. With Jini, devices tell a network what
they are--and what they can do. That way, an advertiser could create
different versions of an Internet promotion--say, a full video for an
interactive TV vs. a one-line headline for a handheld gizmo--knowing
Jini-enabled devices would grab the right one.
Who's best positioned to make these cyberdreams come true? Intel and
Microsoft are not sure bets. Indeed, no one company has all the pieces
in place--yet. Startups tend to have ideas and technology but lack
marketing and distribution muscle. Consumer-electronics companies are
famously slow to adopt new technology and have to bridge decades-old
divisions between product groups.
But today's high-tech powers may have the most at risk. Since info
appliances require inexpensive, highly focused technology, Microsoft
and Intel could have a tough time maintaining the high-margin
hammerlock they enjoy with their current PC technologies. As for PC
makers, they'll need to do more than rush to market zippy new models
chock-full of state-of-the-art technology that consumers have to learn
how to use. Says Philips' Pieper: ''The PC companies move at a higher
speed of innovation--and I'm not sure consumers like it. They'll have
to slow down, and we'll have to speed up.''
For now, all are focused on getting into the game--especially computer
companies. Industry stalwarts such as National Semiconductor (NSM),
disk-drive maker Quantum (QNTM), and modem and graphics board supplier
Diamond Multimedia Systems, are investing heavily in
information-appliance businesses. HP recently unveiled its Capshare
handheld scanner, which by yearend will be able to wirelessly zip
magazine articles through cyberspace. And Compaq Computer Corp. (CPQ)
says it aims to sell set-top boxes and Web phones.
A weak player in the PC era, Sony is scrambling so that it doesn't
miss out on the post-PC age. The consumer-electronics giant is
preparing a slew of innovative products, including a digital picture
frame that displays 50 different color photos, and a 250-person
software unit is working on smart home networks that will let your TV
and stereo recognize you when you walk into the room--and fire up your
favorite tunes or shows.
Not all of these novel products will be blockbusters. But there will
be plenty enough hits to make cash registers ring. Consider Diamond
Multimedia's Rio. The 2.4-ounce, pager-size gizmo can store and play
songs downloaded to a PC in a format called MP3 that makes it feasible
to download music of CD quality through the Web. It's like a tapeless
Walkman, and Diamond (DIMD) has sold 250,000 of the $199 units in just
three months--and the Rio has become a major fad with music lovers.
''It's a viral kind of thing,'' says Diamond CEO William J. Schroeder,
who hopes to sell 750,000 Rios in 1999. ''A year ago, I didn't even
know what MP3 was!''
That's O.K. Because in the post-PC era, most consumers won't need to
know--or care--how their information appliances work.
By Peter Burrows in San Mateo, Calif., with Andy Reinhardt in San
Mateo, Heather Green in New York, and bureau reports
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
What 'Beyond the PC' Means for PC Makers
After years of being the shining star of high-tech products, the
personal computer has suddenly become quite the whipping boy. At the
TED9 high-tech gabfest in Monterey, Calif., from Feb. 17 to 20, for
example, pundits such as Wall Street Journal technology columnist Walt
Mossberg and MIT assistant professor Michael Hawley took turns
pointing out the PC's many ills, all but relegating it to the
trash-heap of digital history. "It's a product meant for office drudge
work that fell off the back of a truck and landed in consumers'
homes," said Hawley. "It's not fit for my mother to use. It's
basically industrial waste."
That's harsh stuff, but consider this: Even some PC makers are getting
a bit frustrated with their product's inherent problems. In fact, by
the end of 1999, some pure PC players will have moved "beyond the PC"
themselves. Startup eMachines, for example, plans to unveil a DVD
player/PC hybrid called the eMedia, that's designed to be used in the
living room for E-mail, Web browsing, and game playing on the
Internet. Packard Bell NEC Inc. expects to have an entertainment-based
product by yearend as well. And Compaq Computer Corp. plans to be
selling wireless communications devices and set-top boxes in a year's
time.
Why break out of the "Wintel" fold now? Because when it comes to
generating profits, the tried and true Microsoft Windows-Intel
processor model seems to be running out of gas -- at least for
companies relying heavily on the sub-$1,000 market that now represents
half of U.S. consumer PC sales, according to ZD Market Intelligence.
It's not just that margins are negligible on today's low-end models,
where a $500 machine might return only $40 or so in profit. Given
Intel's and Microsoft's near-total control of the technical standards,
there's little PC makers can do to make their products stand out -- or
to make easier-to-use machines that would appeal to a broader
audience. "We're on the eve of a revolution in pervasive computing --
and the ease of use of the current PC will never get to where it needs
to be," says Packard Bell NEC Chief Executive Alain Couder. Indeed, he
recently asked his engineers to find a way to remove Windows from the
PC and replace it with a simpler operating system. The response: Not
economically feasible.
DRASTIC CUTS. The result of this profit squeeze has become dangerously
apparent in recent days. On Feb. 19, Packard Bell NEC announced a
15,000-person layoff, along with news that its Packard Bell home-PC
unit had lost more than $1 billion over the past two years. On. Feb
23, Acer America Inc., after years of losses, said it would get out of
unprofitable retail-store channel and sell only via the Interent.
These moves followed Hitachi's Feb. 4 announcement that it would shut
down its U.S. notebook subsidiary, Hitachi PC Corp.
Rather than downsize or surrender, some PC makers are taking a
different tack. To break the cycle of falling prices and shrinking
profits, they're adding services, which may draw new buyers -- and
also produce revenue annuities for the PC companies. On Feb. 24, for
instance, Gateway 2000 announced it would provide free Internet
service to customers who buy a PC costing more than $1,000. Other
companies are expected to make similar moves. Compaq, for one, is
trying all kinds of schemes to find a profit formula that adds up. On
the one hand, it's experimenting with the so-called free PC model: It
will sell 10,000 Presario home PCs to startup Free-PC Inc., which will
"give" them to customers who agree to have online ads appear on the
units 24-hours a day. But Compaq is also buying up software and
E-commerce companies such as Shopping.com, with the goal of creating
services and content that set it apart from the PC crowd.
One PC maker that appears unlikely to stray from the pure Wintel model
is Dell Computer Corp. The Texas company has mastered the direct-order
business and continues to squeeze great profits from conventional PCs.
But even Dell may be feeling the heat from plunging PC prices: Revenue
growth in its most recent quarter fell from historic 50%-plus levels
to just 38%, prompting a shellacking on Wall Street on concerns over a
slowdown.
In the end, high-volume PC producers, including even Dell, will have
to follow the market-segmentation strategy of their patron saint (and
master) Intel, which is trying to compensate for cheaper chips by
selling more high-powered models used in corporate servers and
engineering workstations. So far, that balancing act has helped keep
Intel growing, even as PC prices plunge. For PC makers contemplating a
plunge into ultracheap, low-margin information appliances, having a
high-end server and workstation business could prove to be a crucial
determinant of their continued success.
By Peter Burrows, in San Mateo, Calif.
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